Subsidiaries or Branches: Does One Size Fit All?

Abstract

, and other IMF colleagues for helpful comments and input. The paper also benefited from comments and suggestions by a number of home and host supervisory authorities and key private sector representatives of the financial industry. The views expressed in this paper are those of the authors.

Foreign bank diversification and efficiency prior to and during the financial crisis: Does one business model fit all?

“…On the contrary, the parent bank is directly responsible if the branch becomes distressed. Subsidiary banks, instead, are separate legal entities that are financially and operationally self-sufficient, locally capitalized and under the direct control of local regulators (Fiechter et al, 2011). Because the implications for diversification are likely to be different, we use a dummy variable equal to 1 for branches to control for these effects (Branch).…”

How should we bank with foreigners? An empirical assessment of lending behavior of international banks to six East Asian economies

“…Specifically, encouraging the entry of subsidiaries and less so on branches can shield the said banks from the financial difficulties of their parent banks (Fiechter et al 2011;IMF 2011). This is a very interesting and noteworthy objective at this juncture of the paper, to which we turn to in the next subsection.…”

“…One argument, for instance, is that the attraction of being able to easily protect the assets of subsidiaries of foreign banks as opposed to foreign bank branches (ring-fencing) leads banking regulators to favor an organizational bank structure comprising mainly subsidiaries rather than branches (Mihaljek 2010;Fiechter et al 2011). In addition, as a perceived advantage for the international bank, the ability to screen and monitor its lending activities may be improved by the establishment of a local subsidiary (de Haas and Van Horen, 2011).…”

Changing Forces of Gravity: How the Crisis Affected International Banking

“…One might think that retail-focused subsidiary activity is more information sensitive than wholesale oriented direct and branch activity. However, the lower information sensitivity might result from the fact that subsidiaries, which are engaged in local and geographically close retail markets and also rely on local deposits and deposit guarantees (see also Cerutti et al 2007, Fiechter et al 2011, have better knowledge of the greater region than only wholesale oriented branches or even bank holding companies that are situated in Germany. Information and monitoring costs as proxied by bilateral gravity-type variables might thus be lower than for branches and bank holding companies that do not have this advantage of a better knowledge of the local retail market, which in turn is very important for wholesale activity, too.…”

“…Subsidiaries are legally independent, hold their own equity, are subject to host-country control, and frequently run large-scale retail operations. Therefore, they incur the highest costs in terms of capital requirements, regulatory (start-up) burden, and fixed investments (Cerutti et al 2007, Fiechter et al 2011. Figure 1 shows the structure of the dataset: Suppose that there is a bank holding company Banco Teutonia 6 (BHC) in Germany.…”